Are Hospitals More Efficient Than They Seem?

Oct. 7 (Bloomberg) -- Hospitals have been criticized,
including by me, as wildly inefficient. Yet two new pieces of
evidence suggest that the hospital market may be more efficient
than conventional wisdom suggests.

Hospitals practice medicine in drastically different ways,
and the higher-spending ones don’t seem to generate any better
results than those that spend less. Because of third-party
insurance and other distortions, though, the market doesn’t
punish the inefficient hospitals. That has been the traditional
critique.

A new study suggests, however, that hospitals actually do
gain patients when they provide better value. Economists Amitabh
Chandra of Harvard University, Amy Finkelstein and Adam Sacarny
of the Massachusetts Institute of Technology, and Chad Syverson
of the University of Chicago examined how 5,000 hospitals
treated some 3.5 million patients who suffered heart attacks.
About a third of the patients died within a year of their heart
attack, and the researchers used the variation in survival rates
across hospitals to approximate the quality of care provided.
The average cost of treatment was $16,000, but that also varied
from place to place.

The researchers found that hospitals with higher survival
rates net of the cost of treatment were rewarded with more
patients. More specifically, if in a given year hospital A had
10 percent higher productivity than hospital B, hospital A
tended to have 25 percent higher market share that year and to
experience 4 percent more growth over the subsequent five years.

The team also found that the variation in survival rates
was more important in driving market share than the variation in
cost was. In other words, patients seem to seek out hospitals
with better survival rates but not ones with lower costs.

As the researchers note, “It could be that competitive
market forces re-allocate market share to higher productivity
hospitals, or it could be that higher productivity hospitals
happen to have other features -- such as beautiful lobbies or
good managers -- which separately increase demand. But whatever
the driving force behind them, some force or forces in the
healthcare sector lead it to evolve in a manner favorable to
higher productivity producers.”

The second piece of new evidence comes from a recent
Institute of Medicine report (discussed in a previous column),
which reaffirmed earlier findings that the substantial variation
in Medicare costs across the U.S. could not reliably be linked
to variation in quality. Yet the report also suggested the
principal driver of such variation is not hospitals but rather
post-acute-care services -- such as skilled nursing facilities,
rehabilitation facilities, home health services and hospices.
Were it not for this regional variation in post-acute care, the
overall Medicare spending variation would be 73 percent less.

Both of these studies were carefully done, but there are
still reasons to be cautious about concluding that hospitals are
really wondrous examples of productivity. For example, the
Chandra paper examined only one condition, yet hospitals treat a
lot more than just heart attacks.

In any case, the significant variation in productivity
within each hospital -- how much practice norms differ from
doctor to doctor -- presents a powerful challenge. I suspect
that this internal variation may diminish over the decade ahead,
as digital records are more widely used and as payment systems
move away from the traditional fee-for-service model. Until it
does, though, it is too soon to conclude that hospitals are
actually efficient.

(Peter Orszag is vice chairman of corporate and investment
banking and chairman of the financial strategy and solutions
group at Citigroup Inc. and a former director of the Office of
Management and Budget in the Obama administration.)